When PhatNoise Inc., a Los Angeles-based maker of digital jukeboxes for cars, decided to seek expansion capital from a group of so-called angels last year, Chief Executive Sharon Graves admits she initially thought she might have made a mistake.
At first glance, the wealthy Southland investors listening to her pitch seemed like an unlikely group of backers for PhatNoise.
"They tend to be an older crowd, and our technology is geared toward younger people, but I guess they asked their kids about it," Graves said, chuckling. After a series of presentations, she found a receptive audience.
"It was refreshing," she added, "that an older group of white guys was able to embrace what we're doing."
To the tune of nearly $1 million, no less. Members of the three-county Tech Coast Angels network and the Pasadena Angels, a smaller investing group that meets in the San Gabriel Valley, recently invested that amount in PhatNoise, and the company also landed $2 million from a New York venture capital firm.
Angels, the nickname for individuals who finance and often mentor risky young companies in exchange for equity stakes in the businesses, invested about $30 billion last year, according to an estimate by the University of New Hampshire's Center for Venture Research.
That's down by a third from 2000, the height of the technology investing bubble, the center says. But it was a larger total investment than the $21 billion that professional venture capital firms dished out last year, as they cut their cash outlays more than 80% from 2000 levels.
Except during the bubble era of 1999 and 2000, the center notes, U.S. angel investing has outpaced venture investing every year over the last decade.
Even so, early-stage companies are finding that angel investors, like venture capital firms, are much more cautious about where they will put their money these days. That's true in the Southland and nationwide.
For instance, angels are trying to limit their risk by investing smaller amounts per company and by shying away from entrepreneurs with a promising concept but a shaky business plan.
"It's a predictable reaction to being spanked so many times over the last three years," said Dave Berkus, who started and sold two Southern California companies before becoming a full-time angel in 1993. "There isn't much money for a raw idea now, other than 'friends and family' financing."
In fact, a business often will begin by securing money from relatives and companions. Some entrepreneurs then seek angel financing when something in the range of $200,000 to $1 million can get them to the next stage, such as a finished product or a major contract. That deal size is usually too small to attract established venture capital firms, yet too big for the in-laws.
Individual angels, who make their own decisions but sometimes operate within a network such as the Tech Coast Angels, typically will commit $25,000 or so per company, so an entrepreneur might be able to get $250,000 from a group of 10 investors, for example.
Most angels are high-net-worth investors with at least $1 million in liquid assets, according to the Center for Venture Research. It estimates that there are 300,000 U.S. angels -- about 90% of them men -- and 125 formal networks nationwide, down from 180 groups during the height of the tech boom.
"It's the not-ready-for-prime-time angels who have fallen by the wayside," said Jeffrey Sohl, director of the Center for Venture Research. "What we not so affectionately call the 'doctor and dentist money' is gone, and most of the angels still in the game are cashed-out entrepreneurs."
Like venture capitalists, angels hope for returns of at least 10 times their investment over a five-to-seven-year period, typically if the company is sold or goes public. But that kind of gold strike is the exception rather than the rule, angels say. They count on one or two big hits to make up for the likelihood that many of the companies in their portfolios will fare poorly or flame out completely.
Disasters for the Tech Coast Angels have included 1-800 Wedding, an Orange County bridal registry business. The Angels invested $1.2 million in 1998, Berkus said, and lost everything when the company was shut down three years later.
The Angels also have enjoyed their occasional bonanzas. Some in the group got back more than 100 times their original investment in Internet services company Sandpiper Networks when it was acquired by Digital Island Inc. in 1999. They had put in $135,000, Berkus said, and walked away with $18.7 million.
Sohl pointed out that amid the frenzy for new business ideas in 2000, angels funded about one in four companies that made formal pitches to them. Now, he said, one in 10 companies that pitch themselves to angels can expect to be funded, which is back to the historical norm.
